-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EK7TGuhoAHWAKdwOgrcr5DveuvH/xVs1CJeoSuycRMF3jLTClVjBEeLLr+G58Cki UvbODIuu9gPIT6puBCPIaA== 0000055604-97-000007.txt : 19971114 0000055604-97-000007.hdr.sgml : 19971114 ACCESSION NUMBER: 0000055604-97-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEYSTONE CONSOLIDATED INDUSTRIES INC CENTRAL INDEX KEY: 0000055604 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 370364250 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03919 FILM NUMBER: 97712542 BUSINESS ADDRESS: STREET 1: 5430 LBJ FWY STE 1740 STREET 2: THREE LINCOLN CENTRE CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144580028 MAIL ADDRESS: STREET 1: 5430 LBJ FWY STE 1740 STREET 2: THREE LINCOLN CENTRE CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: KEYSTONE STEEL & WIRE CO DATE OF NAME CHANGE: 19710506 10-Q 1 KEYSTONE CONSOLIDATED INDUSTRIES FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 1997 Commission file number 1-3919 KEYSTONE CONSOLIDATED INDUSTRIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 37-0364250 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5430 LBJ Freeway, Suite 1740, Three Lincoln Centre, Dallas, TX. 75240-2697 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 458-0028 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No Number of shares of common stock outstanding at November 10, 1997: 9,297,533 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES INDEX Page number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 31, 1996 and September 30, 1997 3-4 Consolidated Statements of Operations - Three months and nine months ended September 30, 1996 and 1997 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 1996 and 1997 6-7 Consolidated Statement of Redeemable Preferred Stock and Common Stockholders' Equity (Deficit) - Nine months ended September 30, 1997 8 Notes to Consolidated Financial Statements 9-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 21 KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, SEPTEMBER 30, ASSETS 1996 1997 Current assets: Cash and cash equivalents $ - $ 46,261 Notes and accounts receivable 35,974 38,081 Inventories 36,533 39,418 Deferred income taxes 16,381 19,722 Prepaid expenses 1,542 915 Total current assets 90,430 144,397 Property, plant and equipment 262,441 271,018 Less accumulated depreciation 169,833 174,915 Net property, plant and equipment 92,608 96,103 Other assets: Restricted investments 7,691 7,507 Prepaid pension cost 104,726 109,468 Deferred income taxes 2,181 - Deferred financing costs 332 3,762 Other 4,400 5,157 Total other assets 119,330 125,894 $302,368 $366,394
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, SEPTEMBER 30, 1996 1997 Current liabilities: Notes payable and current maturities of long-term debt $ 34,760 $ 334 Accounts payable 34,419 30,513 Accounts payable to affiliates 159 - Accrued OPEB cost 8,368 8,409 Other accrued liabilities 28,631 37,702 Total current liabilities 106,337 76,958 Noncurrent liabilities: Long-term debt 17,020 101,143 Accrued OPEB cost 100,818 101,611 Negative goodwill 27,057 25,760 Other 16,466 15,866 Total noncurrent liabilities 161,361 244,380 Redeemable preferred stock 3,500 3,500 Stockholders' equity: Common stock 9,920 10,027 Additional paid-in capital 46,347 47,166 Accumulated deficit (25,085) (15,625) Treasury stock, at cost (12) (12) Total stockholders' equity 31,170 41,556 $302,368 $366,394
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three months ended Nine months ended September 30, September 30, 1996 1997 1996 1997 Revenues and other income: Net sales $82,703 $85,046 $252,821 $277,427 Interest 34 570 47 577 Other, net 117 1,223 290 1,658 82,854 86,839 253,158 279,662 Costs and expenses: Cost of goods sold 74,531 76,889 232,206 247,481 Selling 992 1,082 2,998 3,542 General and administrative 5,197 3,830 14,493 13,110 Overfunded defined benefit pension credit - (3,241) - (4,741) Interest 808 2,383 2,677 5,119 81,528 80,943 252,374 264,511 Income before income taxes 1,326 5,896 784 15,151 Provision for income taxes 534 2,197 319 5,481 Net income 792 3,699 465 9,670 Dividends on preferred stock - 70 - 210 Net income available for common shares $ 792 $ 3,629 $ 465 $ 9,460 Primary net income available for common shares per common and common equivalent share $ .14 $ .38 $ .08 $ 1.01 Fully diluted net income available for common shares per common and common equivalent share $ .14 $ .38 $ .08 $ 1.00 Weighted average common and common equivalent shares outstanding: Primary 5,690 9,587 5,682 9,386 Fully diluted 5,690 9,628 5,682 9,443
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine months ended September 30, 1996 1997 Cash flows from operating activities: Net income $ 465 $ 9,670 Depreciation and amortization 10,530 9,692 Amortization of deferred financing costs 118 337 Deferred income taxes (2,271) 2,492 Other, net 1,075 137 Change in assets and liabilities: Notes and accounts receivable (7,754) (2,320) Inventories 5,564 (2,885) Accounts payable 1,960 (4,065) Pension cost (4,871) (4,742) Other, net 961 6,434 Net cash provided by operating activities 5,777 14,750 Cash flows from investing activities: Capital expenditures (10,423) (17,400) Merger costs (935) - Proceeds from sale of property, plant and equipment 4 2,708 Other, net 125 166 Net cash used by investing activities (11,229) (14,526) Cash flows from financing activities: Revolving credit facility, net (458) (31,095) Other notes payable and long-term debt: Borrowings 9,461 100,294 Principal payments (3,336) (19,502) Preferred stock dividend payments - (210) Deferred financing costs paid (215) (3,767) Common stock issued - 317 Net cash provided by financing activities 5,452 46,037 Net change in cash and cash equivalents - 46,261 Cash and cash equivalents, beginning of period - - Cash and cash equivalents, end of period $ - $ 46,261
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In thousands)
Nine months ended September 30, 1996 1997 Supplemental disclosures: Cash paid for: Interest, net of amount capitalized $ 3,031 $ 4,037 Income taxes 991 2,700 Common stock contributed to employee benefit plan $ 522 $ 578 Business combination: Net assets consolidated: Noncash assets $101,981 $ - Liabilities (60,906) - Negative goodwill (5,727) - 35,348 - Redeemable preferred stock issued, including accumulated unpaid dividends (5,100) - Common stock issued (29,313) - Cash paid $ 935 $ -
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) Nine months ended September 30, 1997 (In thousands)
Common stockholders' equity Redeemable Additional preferred Common paid-in Accumulated Treasury stock Stock capital deficit stock Total Balance - December 31, 1996 $3,500 $9,920 $46,347 $(25,085) $ (12) $31,170 Net income - - - 9,670 - 9,670 Issuance of common stock - 107 819 - - 926 Preferred dividends declared 210 - - (210) - (210) Preferred dividends paid (210) - - - - - Balance - September 30, 1997 $3,500 $10,027 $47,166 $(15,625) $ (12) $41,556
KEYSTONE CONSOLIDATED INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and basis of presentation: The consolidated balance sheet at December 31, 1996 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at September 30, 1997 and the consolidated statements of operations and cash flows for the interim periods ended September 30, 1996 and 1997, and the consolidated statement of redeemable preferred stock and common stockholders' equity for the interim period ended September 30, 1997, have each been prepared by the Company, without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. However, it should be understood that accounting measurements at interim dates may be less precise than at year end. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. Certain information normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "Annual Report"). Contran Corporation ("Contran") holds, directly or through subsidiaries, approximately 41% of the Company's outstanding stock. Contran may be deemed to control the Company. Note 2 - Net income available for common shares per common and common equivalent share: Net income per share is based on the weighted average number of common and common equivalent shares outstanding during each year. Outstanding stock options and other common stock equivalents are excluded from the computations when the effect of their assumed exercise is antidilutive. Effective December 31, 1997, the Company will retroactively adopt Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic earnings per share pursuant to SFAS No. 128 will not be materially different from earnings per share presented herein and diluted earnings per share pursuant to SFAS No. 128 is not expected to be materially different from basic earnings per share. Note 3 - Acquisition: On September 27, 1996, the stockholders of Keystone and DeSoto, Inc. ("DeSoto") approved the merger of the two companies (the "Acquisition") in which DeSoto became a wholly-owned subsidiary of Keystone. The Acquisition included the simultaneous merger of Keystone's three underfunded defined benefit pension plans with and into DeSoto's overfunded defined benefit pension plan, which resulted in an overfunded plan for financial reporting purposes. The following pro forma financial information has been prepared assuming the Acquisition and the simultaneous merger of the defined benefit pension plans occurred as of January 1, 1996. The pro forma financial information also reflects adjustments to assume that the April 1996 sale of DeSoto's Union City, California business occurred as of December 31, 1995. The pro forma financial information is not necessarily indicative of actual results had the transactions occurred at the beginning of the period, nor do they purport to represent results of future operations of the merged companies.
Three months ended Nine months ended September 30, September 30, 1996 1996 (In millions, except per share data) Revenues and other income $87.0 $264.8 Net income 1.2 .3 Net income available to common stockholders 1.1 .1 Net income (loss) per Keystone common share $ .12 $ (.01)
Assuming the Acquisition and pension plan merger occurred January 1, 1996, pro forma net periodic defined benefit pension expense amounted to approximately $.4 million and $2.8 million during the three month and nine month periods, respectively, ended September 30, 1996. Historical pension expense during the same periods amounted to approximately $1.0 million, and $4.8 million, respectively. Note 4 - Inventories: Inventories are stated at the lower of cost or market. The last-in, first- out ("LIFO") method is used to determine the cost of approximately three-fourths of total inventories and the first-in, first-out or average cost methods are used to determine the cost of other inventories.
December 31, SEPTEMBER 30, 1996 1997 (In thousands) Raw materials: Steel and wire products $12,548 $15,078 Household cleaning products 526 461 13,074 15,539 Work in process - Steel and wire products 12,824 12,323 Finished products: Steel and wire products 9,954 10,364 Household cleaning products 96 286 10,050 10,650 Supplies: Steel and wire products 13,612 13,934 49,560 52,446 Less LIFO reserve: Steel and wire products 12,996 12,997 Household cleaning products 31 31 13,027 13,028 $36,533 $39,418
Note 5 - Notes payable and long-term debt: On August 7, 1997, the Company issued $100 million principal amount of 9 5/8% Senior Secured Notes (the "Notes"). The Notes are due in August 2007 and are collateralized by a second priority lien on substantially all of the existing and future fixed assets of the Company. A portion of the $97 million net proceeds was used to prepay and terminate the Company's term loan and repay outstanding borrowings under the Company's revolving credit facility. The Notes were issued pursuant to an Indenture (the "Indenture") which, among other things, provides for optional redemptions, mandatory redemptions and certain covenants including provisions that, among other things, limit the ability of the Company to sell capital stock of subsidiaries, enter into sale and leaseback transactions and transactions with affiliates, create new liens and incur additional debt. In addition, the Company's ability to borrow in excess of $25 million under the Company's $55 million Revolving Credit Facility is dependent upon maintenance of certain financial ratios, as defined by the Indenture. The Indenture also limits the ability of the Company to pay dividends or make other restricted payments, as defined.
December 31, SEPTEMBER 30, 1996 1997 (In thousands) 9 5/8% Senior Secured Notes $ - $100,000 Commercial credit agreements: Revolving credit facility 31,095 - Term loan 19,166 - Urban and Community Development Assistance Grants 1,267 1,075 Other 252 402 51,780 101,477 Less current maturities 34,760 334 $ 17,020 $101,143
Note 6 - Income taxes: The difference between the provision for income taxes and the amounts that would be expected using the U.S. federal statutory income tax rate is presented in the table below.
Three months ended Nine months ended September 30, September 30, 1996 1997 1996 1997 (IN THOUSANDS) Expected tax expense, at statutory rate $ 464 $ 2,064 $ 274 $ 5,303 U.S. state income taxes, net (88) 4 (119) 332 Amortization of negative goodwill - (119) - (448) Other, net 158 248 164 294 Provision for income taxes charged to results of operations 534 2,197 319 5,481 Stockholders' equity - pension component - (969) - 2,272 Comprehensive provision for income taxes $ (435) $ 2,197 $ 2,591 $ 5,481 Comprehensive provision for income taxes: Currently payable: U.S. federal $ 1,308 $ 872 $ 3,921 $ 5,185 U.S. state (4) (95) 468 668 Alternative minimum tax credits (507) (508) (1,797) (2,864) Net currently payable 797 269 2,592 2,989 Deferred income taxes, net (1,232) 1,928 (1) 2,492 $ (435) $ 2,197 $ 2,591 $ 5,481
Prior to the Acquisition, DeSoto received an Income Tax Examination Changes notice from the Internal Revenue Service that proposed adjustments resulting in additional taxes, penalties and interest for the years 1990 through 1993. DeSoto filed a formal appeal of the proposed adjustments and, in prior years, accrued an estimate of its liability related to this matter. In October 1997, DeSoto settled the matter with the IRS for a payment of approximately $2.6 million, including interest of approximately $1.1 million. Such payment was within previously accrued amounts. Note 7 - Other accrued liabilities:
December 31, SEPTEMBER 30, 1996 1997 (In thousands) Current: Salary, wages, vacations and other employee expenses $11,085 $10,479 Environmental 5,354 7,660 Disposition of facilities 3,518 2,463 Interest 452 1,589 Self insurance 1,585 6,710 Legal and professional 1,542 1,290 Other 5,095 7,511 $28,631 $37,702 Noncurrent: Environmental $12,787 $ 9,693 Deferred gain 2,383 2,086 Other 1,296 4,087 $16,466 $15,866
Note 8 - Contingencies: At September 30, 1997, the Company's financial statements reflected accrued liabilities of $17.4 million for estimated remedial costs arising from environmental issues. There is no assurance regarding the ultimate cost of remedial measures that might eventually be required by environmental authorities or that additional environmental hazards, requiring further remedial expenditures, might not be asserted by such authorities or private parties. Accordingly, the ultimate costs of remedial measures may exceed the amounts currently accrued. For additional information related to commitments and contingencies, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Annual Report. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: Keystone is a leading manufacturer of fabricated wire products, industrial wire and carbon steel rod for the agricultural, industrial, construction, original equipment manufacturer and retail consumer markets. Historically, the Company has experienced greater sales and profits during the first half of the year due to the seasonality of sales in principal wire products markets, including the agricultural and construction markets. The statements in this Quarterly Report on Form 10-Q relating to matters that are not historical facts including, but not limited to, statements found in this Item 2 - Management's Discussion And Analysis Of Financial Condition And Results Of Operations", are forward looking statements that involve a number of risks and uncertainties. Factors that could cause actual future results to differ materially from those expressed in such forward looking statements include, but are not limited to, cost of raw materials, future supply and demand for the Company's products (including cyclicality thereof), general economic conditions, competitive products and substitute products, customers and competitor strategies, the impact of pricing and production decisions, environmental matters, government regulations and possible changes therein, and the ultimate resolution of pending litigation, successful implementation of the Company's capital improvements plan and any possible future litigation as discussed in this Quarterly Report and the Annual Report, including, without limitation, the section referenced above. The following table sets forth the Company's production and sales volume data for the periods indicated.
Three months ended Nine months ended September 30, September 30, 1996 1997 1996 1997 (In thousands of tons) Production volume: Billets: Produced 172 149 481 488 Purchased 15 29 36 67 Rod 179 165 516 546 Sales volume: Fabricated wire products 55 56 172 181 Industrial wire 43 43 122 132 Steel rod 75 64 232 230 173 163 526 543
The following table sets forth the components of the Company's net sales for the periods indicated.
Three months ended Nine months ended September 30, September 30, 1996 1997 1996 1997 (In millions) Fabricated wire products $39.1 $39.5 $124.1 $128.6 Industrial wire 20.5 20.5 58.4 62.9 Rod 22.7 21.3 69.1 72.4 Household cleaning products and other .4 3.7 1.2 13.5 $82.7 $85.0 $252.8 $277.4
The following table sets forth selected operating data of the Company as a percentage of net sales for the periods indicated.
Three months ended Nine months ended September 30, September 30, 1996 1997 1996 1997 Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 90.1 90.4 91.8 89.2 Gross profit 9.9 9.6 8.2 10.8 Selling expense 1.2 1.3 1.2 1.3 General and administrative expense 6.3 4.5 5.7 4.7 Overfunded defined benefit pension credit - 3.8 - 1.7 Income before income taxes 1.6 6.9 .3 5.5 Provision for income taxes .6 2.6 .1 2.0 Net income 1.0% 4.3% .2% 3.5%
In previous years, the Company conducted an annual two-week shutdown in December for maintenance and repairs at its Peoria, Illinois facility. In 1997, the maintenance shutdown was completed in the third quarter. As such, volume of steel and wire products shipped in the third quarter of 1997 declined 6% as compared to the third quarter of 1996. Despite lower volumes in the 1997 third quarter, a 5% overall increase in steel and wire product selling prices resulted in overall steel and wire product sales declining only 1% from the 1996 third quarter level. Selling prices for rod and industrial wire increased 10% and 1% in 1997, respectively, while fabricated wire product selling prices declined slightly. During the first nine months of 1997 overall steel and wire products selling prices increased 2% over the first nine months of 1996. Rod selling prices increased 6% in the first nine months of 1997 while fabricated wire products selling prices decreased 1% and industrial wire selling prices remained level with those of the same period in 1996. As a result of these increased selling prices, as well as higher sales volumes in the first nine months of 1997, steel and wire product sales increased 5% over the same period in 1996. Gross profit remained constant at $8.2 million as compared to the 1996 third quarter. Gross profit margin decreased to 9.6% in 1997 from 9.9% in 1996, primarily as a result of higher rod conversion costs, power interruptions in 1997 at the Company's Peoria, Illinois facility and increased purchased billets, all partially offset by lower scrap costs and reduced pension expense. The Company purchases electrical energy for the Peoria facility under an interruptible service contract which provides for more economical electricity rates but allows the utility to refuse or interrupt power to the Company's manufacturing facilities during periods of peak demand. During the 1997 third quarter, the Company purchased 159,000 tons of scrap at an average price of $122 per ton as compared to 1996 third quarter purchases of 180,000 tons at an average price of $127 per ton. The acquisition of DeSoto in September 1996 included the simultaneous merger of the Company's and DeSoto's defined benefit pension plans. Pension expense charged to cost of goods sold was $1.0 million in the third quarter of 1996. The merger of the Company's defined benefit pension plans in connection with the acquisition of DeSoto in September 1996 resulted in a single overfunded defined benefit pension plan. As a result of the overfunded status of this plan, the Company recorded a pension credit of $3.2 million in the third quarter of 1997. Gross profit increased approximately 45% to $29.9 million in the first nine months of 1997 from $20.6 million in the first nine months of 1996. Gross profit margin increased to 10.8% in 1997 from 8.2% in 1996, primarily as a result of lower scrap costs and pension expense offset by higher rod conversion costs and increased purchased billets. During the first nine months of 1997, the Company purchased 519,000 tons of scrap at an average price of $122 per ton as compared to 1996 purchases of 489,000 tons at an average price of $127 per ton. Pension expense charged to cost of goods sold was $4.8 million in the first nine months of 1996. As a result of the overfunded status of the Company's defined benefit pension plan, Keystone recorded a pension credit of $4.7 million in the first nine months of 1997. Selling expenses increased to $1.1 million in the third quarter of 1997 from $1.0 million in the 1996 third quarter, but remained relatively constant as a percentage of net sales. Selling expenses increased to $3.5 million in the first nine months of 1997 from $3.0 million in the first nine months of 1996, but also remained relatively constant as a percentage of net sales. General and administrative expenses decreased $1.4 million during the third quarter of 1997 as compared to the third quarter of 1996. This decrease was primarily due to lower environmental charges in the 1997 third quarter. General and administrative expenses also decreased $1.4 million during the first nine months of 1997 as compared to the first nine months of 1996, due primarily to lower environmental charges. At September 30, 1997, the Company's financial statements reflected accrued liabilities of $17.4 million for estimated remediation costs arising from environmental issues. There is no assurance regarding the ultimate cost of remedial measures that might eventually be required by environmental authorities or that additional environmental hazards, requiring further remedial expenditures, might not be asserted by such authorities or private parties. Accordingly, the ultimate costs of remedial measures may exceed the amounts currently accrued. Interest expense in the third quarter of 1997 was higher than the third quarter of 1996 due principally to higher average borrowing levels as a result of the issuance of $100 million principal amount of 9 5/8% Senior Secured Notes (the "Notes") in August 1997. Average borrowings by the Company under its revolving credit facility, term loan and the Notes approximated $80.0 million in the third quarter of 1997 as compared to $34.1 million in the third quarter of 1996. During the third quarter of 1997, the average interest rate paid by the Company was 9.6% per annum as compared to 9.3% per annum in the third quarter of 1996. Interest expense in the first nine months of 1997 was higher than the first nine months of 1996 due principally to higher borrowing levels. Average borrowings by the Company under its revolving credit facility, term loan and the Notes approximated $64.1 million in the first nine months of 1997 as compared to $37.5 million in the first nine months of 1996. During the first nine months of 1997, the average interest rate paid by the Company was 9.5% per annum as compared to 9.3% per annum in the first nine months of 1996. As a result of the issuance of the Notes, interest expense in the future will be greater than the historic levels in the fourth quarter of 1996 or the first nine months of 1997. In August 1997, the Company recorded a pre-tax gain of approximately $1.8 million resulting from the sale of a building that was used by one of the Company's former operating divisions. The operating division was sold in 1989, but the Company retained the building. The principal reasons for the difference between the U.S. federal statutory income tax rate and the Company's effective income tax rates are explained in Note 6 to the Consolidated Financial Statements. As a result of the items discussed above, net income during the third quarter of 1997 increased to $3.7 million from $.8 million in the third quarter of 1996, and net income during the first nine months of 1997 increased to $9.7 million from $.5 million in the first nine months of 1996. LIQUIDITY AND CAPITAL RESOURCES: The Company's cash flows from operating activities are affected by the seasonality of its business as sales of certain products used in the agricultural and construction industries are typically highest during the second quarter and lowest during the fourth quarter of each year. These seasonal fluctuations, as well as the annual shutdown for maintenance and repairs at the Company's Peoria facility, impact the timing of production, sales and purchases and have typically resulted in a use of cash from operations during the first quarter of each year. On August 7, 1997, the Company issued $100 million principal amount of the Notes. The Notes are due in August 2007 and are collateralized by a second priority lien on substantially all of the existing and future fixed assets of the Company. A portion of the $97 million net proceeds was used to retire the Company's term loan and repay borrowings under the Company's revolving credit facility. The balance of the net proceeds will be used for general corporate purposes, primarily financing capital expenditures. The Notes were issued pursuant to an Indenture (the "Indenture") which, among other things, provides for optional redemptions, mandatory redemptions and certain covenants including provisions that, among other things, limit the ability of the Company to sell capital stock of subsidiaries, enter into sale and leaseback transactions and transactions with affiliates, create new liens and incur additional debt. The Indenture also limits the ability of the Company to pay dividends or make other restricted payments, as defined. At September 30, 1997 the Company had working capital of $67.4 million, including $46.3 million of cash and cash equivalents. The Company did not have any outstanding borrowings under the $55 million revolving credit facility at September 30, 1997. The amount of available borrowings under the Company's revolving credit facility is based on formula-determined amounts of trade receivables and inventories, less the amount of outstanding letters of credit. The Company's ability to borrow in excess of $25 million under the revolving credit facility is dependent upon maintenance of certain cash flow ratios, as defined by the Indenture. Available borrowings under the Company's revolving credit facility, which expires December 31, 1999, were $54.4 million at September 30, 1997. During the first nine months of 1997, the Company's operating activities provided approximately $14.8 million of cash compared to $5.8 million in the first nine months of 1996. In addition to higher earnings in the 1997 period, cash flow from operations was impacted by changes in relative levels of assets and liabilities, including levels of pension fundings. Defined benefit pension plan contributions were $9.7 million in the first nine months of 1996. Due to the DeSoto merger, the Company did not make any contributions to its pension plan during the first nine months of 1997 and does not expect to be required to make contributions to the pension plan during the remainder of 1997 or in 1998. Future variances from actuarially assumed rates, including the rate of return on pension plan assets, may result in increases or decreases to pension expense or credit and funding requirements in future periods. During the third quarter of 1997, DeSoto received approximately $4.7 million from one of its insurors in exchange for releasing the insuror from coverage for certain years of environmental related liabilities. Such amount is included in the Company's self insurance accruals at September 30, 1997. Immediately following the Acquisition, Keystone was obligated to, and did, cause DeSoto to pay certain of DeSoto's trade creditors (the "Trade Credit Group") 80% of the balance of the trade payables then due to the Trade Credit Group. The remaining 20% of the balance ($1.4 million) due to the Trade Credit Group, plus interest at 8%, was paid by DeSoto in February 1997. The Company has commenced a three year, $75 million capital improvements plan to upgrade certain of its plant and equipment and eliminate production capacity bottlenecks in order to reduce costs and improve production efficiency. The principal components of the Company's capital improvements plan include reconfiguring its electric arc furnace, replacing the caster and upgrading its wire and rod mills. During the first nine months of 1997, the Company made capital expenditures of approximately $17.4 million primarily related to upgrades of production equipment and an information systems project at its facility in Peoria, Illinois. Capital expenditures for 1997 are currently estimated to be approximately $26 million and are related primarily to upgrades and debottlenecking of production equipment. The Company incurs significant ongoing costs for plant and equipment and substantial employee medical benefits for both current and retired employees. As such, the Company is vulnerable to business downturns and increases in costs, and accordingly, routinely compares its liquidity requirements and capital needs against its estimated future operating cash flows. As a result of this process, the Company has in the past, and may in the future, reduce controllable costs, modify product mix, acquire and dispose of businesses, restructure certain indebtedness, and raise additional equity capital. The Company will continue to evaluate the need for similar actions or other measures in the future in order to meet its obligations. The Company also routinely evaluates acquisitions of interests in, or combinations with, companies related to the Company's current businesses. The Company intends to consider such acquisition activities in the future and, in connection with this activity, may consider issuing additional equity securities or increasing the indebtedness of the Company. The Company's ability to incur new debt in the future is limited by the terms of the Indenture. Management believes the cash flows from operations together with available cash will provide sufficient funds to meet its anticipated operating and capital expenditure needs for the remainder of 1997 and the year ending December 31, 1998. This belief is based upon management's assessment of various financial and operational factors, including, but not limited to, assumptions relating to product shipments, product mix and selling prices, production schedules, productivity rates, raw materials, electricity, labor, employee benefits and other fixed and variable costs, working capital requirements and capital expenditures. However, liabilities under environmental laws and regulations with respect to the clean-up and disposal of wastes, any significant increases in the cost of providing medical coverage to active and retired employees, significant declines in the Company's end user markets or market share, the inability to maintain satisfactory billet and rod production levels, or other unanticipated costs, if significant, could have a material adverse effect on the future liquidity, financial condition and results of operations of the Company. PART II. ITEM 1. Legal Proceedings Reference is made to disclosure provided under the caption "Current litigation" in Note 13 to the Consolidated Financial Statements included in the Annual Report. Note 8 to the Consolidated Financial Statements is incorporated herein by reference. ITEM 6. Exhibits and Reports on Form 8-K (a) 27.1 Financial Data Schedule for the nine month period ended September 30, 1997. (b) Reports on Form 8-K filed during the quarter ended September 30, 1997: A current report on Form 8-K, dated as of August 7, 1997, was filed to report the Company had completed a private placement of $100 million principal amount of 9 5/8% Senior Secured Notes maturing in August 2007. S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Keystone Consolidated Industries, Inc. (Registrant) Date: November 12, 1997 By /s/Harold M. Curdy Harold M. Curdy Vice President - Finance/Treasurer (Principal Financial Officer) Date: November 12, 1997 By /s/Bert E. Downing, Jr. Bert E. Downing, Jr. Corporate Controller (Principal Accounting Officer) EX-27 2 KEYSTONE FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from Keystone Consolidated Industries, Inc.'s consolidated financial statements for the three months ended September 30, 1997 and is qualified in its entirety by reference to such. 1,000 9-MOS DEC-31-1997 SEP-30-1997 46,261 0 38,728 647 39,418 144,397 271,018 174,915 366,394 76,958 101,143 3,500 0 10,027 31,529 366,394 277,427 279,662 247,481 247,481 11,733 178 5,119 15,151 5,481 9,670 0 0 0 9,670 1.01 1.00
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